There has been a lot of wringing of hands and blog chatter on Greenspan confessing he couldn't explain why long term rates have stayed low. His conundrum is not that hard to figure out, but perhaps not the best thing to openly discuss. The Dollar is used as the international exchange currency. The US can run a persistent 6% trade deficit for an expended period due to the demand for Dollars as a reserve currency. China has begun moving away from the Dollar to a basket of currencies, which is sometimes called YE$ for the Yen Euro and Dollar, although the China basket is broader - they are attempting to reserve in rough proportion to their trading partners. There is, however, one trade they cannot diversify away - oil. The oil trade is in Dollars. (Iraq for a time tried to move to Euros, and look what happened to them.) As their demand for oil increases, and especially as the price of oil in Dollars increases, they need those greenbacks. Oil has gone up considerable recently. The Dollar itself is once again rising, as it has been since Dec04. Perhaps inflation is also rising, which should cause long term rates to rise - although whether there is core inflation is unclear. What is clear is that the demand for Dollars shows up as bids for US Treasuries, propping up the value of the long bond and keeping rates low. Q.E.D.
If this continues, the long bond will drop below 3% before it sees 5%. Such a conundrum!